On 7 March 2024, Paul Stanley KC (sitting as a Deputy High Court Judge) handed down a judgment concerning lifting of an administration moratorium to allow a counterclaim against a company in administration to proceed.
Whilst the High Court allowed the Defendant's counterclaim to proceed, it imposed various conditions on the Defendant, as set out in this article.
Background
In 2016, the Claimant, Cargologicair Limited ("CLA") agreed to lease a Boeing 747-400 from Wwtai Airopco 1 Bermuda Limited ("Airopco"). Following the imposition of a flight ban on Russian-owned or controlled aircraft in February 2022, Airopco gave notice of events of default to CLA in March 2022, and purported to terminate the lease pursuant to a notice dated 4 April 2022. The lease was terminated in 2022. Airopco subsequently took possession of the aircraft and sold it to a third party.
On 16 November 2022, CLA was placed into administration. Particulars of claim were served on Airopco by CLA in July 2023 on the basis that:
- the termination of the lease was unlawful; and
- CLA was entitled to the return of the security deposit of USD 2 million and to unquantified damages for having been deprived of the chance to restructure the ownership of its business to avoid the effect of sanctions.
The defence and counterclaim were served by Airopco in September 2023. Neither the administrators' consent nor the Court's permission to make the counterclaim was obtained.
CLA made an application to strike out Airopco's counterclaim on the basis (inter-alia) that:
- the counterclaim had been issued in breach of the statutory moratorium that applies in respect of proceedings against companies in administration;
- absent retrospective consent or permission being forthcoming, the counterclaim should be struck out;
- permission should only be given once Airopco's damages claim was adequately pleaded; and
- when assessing whether or not to allow the counterclaim to proceed, the Court must consider and balance the respective interests of Airopco against the collective interests of the creditors and the purpose of the administration.
Should permission have been obtained for the counterclaim?
Under paragraph 43 of Schedule B1 to the Insolvency Act 1986, no legal process (including legal proceedings, which includes a counterclaim) may be commenced against a company in administration without the consent of the administrator or the Court.
The established case of Mortgage Debenture Ltd v Chapman [2016] EWCA Civ 103, [2016] 1 WLR 3048 (which was considered by Paul Stanley KC in his judgment) held that permission is not required where a counterclaim is "pleaded solely to raise a defence by way of set off".
However, in distinguishing Mortgage Debenture with the present case, Paul Stanley KC noted the use of the word "solely" (which he deemed to be critical) and made the following analysis:
- When a counterclaim is pleaded solely as a defence, permission is not required. This was not the case here. Airopco's counterclaim (although unquantified) had the potential to exceed any sums due to CLA.
- Airopco's counterclaim sought an additional remedy ofdelivery up of the aircraft's documents and included provision for the payment of damages and interest.
In view of the above, the Judge held it cannot credibly be said that the counterclaim had a solely defensive purpose, or it was incapable of having any offensive effect. As such, the Court concluded, permission ought to have been obtained before making a claim.
Was permission for counterclaim granted?
Whilst the Court considered that Airocorp should have obtained permission prior to issuing the counterclaim, it nevertheless proceeded to grant retrospective permission and allowed the counterclaim to proceed (albeit with caveats, as discussed below).
In reaching its decision to allow the counterclaim to proceed, the Court considered three important factors (paragraphs 17 to 19 of the judgment):
a. First, it will often be in the creditors' collective interests, as well as the individual claimant's, to arrive at a definitive decision as to liability and therefore understand the company's financial position. Understanding the company's financial obligations would positively assist where (as here) the administrators are considering making distributions to creditors.
b. Second, the balance is more likely to lie in favour of the determination and preservation of an individual's proprietary rights, to which the Court attaches great importance (Sunberry Properties Ltd v Innovate Logistics Ltd [2008] EWCA Civ 1321) and Re Atlantic Computer Systems plc [1992] Ch 5050).
c. Third, even if a claim is not solely defensive, the fact that it is partly defensive, and closely connected with a claim that the company is itself making, may be important. It would never be equitable to prevent a person from deploying a defence against a claim by the company. The administrators (if they choose to maintain a claim) would inevitably have to devote the resources necessary to deal with the defence. The Court held there was something "fundamentally questionable" about a company making claims arising from a set of events but refusing to permit the target of its action to assert cross-claims arising from the very same facts.
In such circumstances, the Court granted retrospective permission for Airopco's counterclaim to proceed. However, in doing so, the Court imposed certain conditions on Airopco:
a. Airopco would refrain from executing or enforcing any money judgment obtained in the counterclaim without the Court's permission or the Administrators' consent.
b. Airopco would provide its best current estimate of the market rent obtainable for the aircraft in the condition that it was when returned (including as to its documentation).
c. Airopco would disclose the sale contract by which it sold the aircraft to a third party.
Comment
Defendants should bear in mind of the potential need to obtain consent either from the administrators or the Court in respect of any counterclaim. If such consent is required and not sought, there is a risk of the Court refusing to grant retrospective permission for proceedings to continue (which will have costs implications). In addition, Cargologicair Limited v Wwtai Airopco 1 Bermuda Limited shows the Court has wide discretion to impose conditions even if permission is granted, which might carry additional burden on the defendant. Whilst the judgment presented good news for Airopco, the conditions imposed by the Court in this case may indicate the sort of conditions which might apply when a defendant may wish to make a counterclaim against a company in administration in the future. Any defendant in this position should take early advice on navigating the moratorium and any potential conditions which apply to consent to lift the moratorium.